There are significantly more ESG-dedicated funds starting to be launched by asset managers in the region, as well as managers tailoring existing fund products to improve their ESG credentials. These trends are further supported by the number of asset managers in the region signing up to the Principles for Responsible Investment (PRI) which has almost tripled in the last five years from 104 to 303.

We have seen demand for the introduction of ESG metrics from private equity funds in the Asia Pacific region climbing significantly, driven by a number of factors including: pressure from large institutional investors, support from regulators and the recognition of the value and operational best practice that can be instilled through ESG principles.

Driving forces of ESG in APAC - Institutional investment trends

Some of the key driving forces behind growth in ESG’s prominence are the large institutional investors in the private markets. Japan’s Government Pension Investment Fund, committed to ESG investing over five years ago, followed by the national pension and sovereign funds in China, Hong Kong, Malaysia and Thailand in more recent years. Asia Pacific-based private equity funds are increasingly taking ESG issues on board, while ESG-oriented managers are gaining a competitive advantage as they raise their fundraising profile outside of APAC.

Institutional allocators are becoming more demanding of private equity funds they award money to, seeking evidence of ESG policies and how they are implemented. Having a policy in place is no longer a simple tick-the-box exercise; investors want to understand how they are incorporating ESG metrics into due diligence processes, evaluating portfolio company performance and any dialogue they may have with management teams on ESG matters.

Regulatory support

But it isn’t just institutional investors driving changes. Governments and regulators in Asia are now supporting ESG initiatives, favouring a longer-term view of the sustainable finance agenda.

For example, the PBOC (People’s Bank of China) has just updated its list of eligible green bond projects to exclude “clean utilisation of coal”, a significant step towards carbon reduction targets, while the MAS (Monetary Authority of Singapore) has recently proposed new guidelines on environmental risk management for asset managers, banks and insurers. The market has welcomed these measures as a good starting point and a supportive regulatory step.

Meanwhile, Hong Kong has also taken a proactive stance - Hong Kong Exchanges and Clearing Limited (HKEx) has tightened ESG regulations, and is set to introduce new mandatory disclosure requirements. Meanwhile, Hong Kong's Securities and Futures Commission (SFC) is proposing to change its Fund Managers' Code of Conduct to require fund managers to take climate-related risks into consideration when managing risks and investments. It also wants to compel them to make additional ESG disclosures to satisfy investors’ growing demand for information about climate risk and to combat 'greenwashing.'

For private market participants in APAC, this shifting regulatory environment is pushing them to think about ESG factors more closely than ever before.

Performance

A third key incentive for ESG adoption among private market fund managers in APAC is performance and value creation. Increasingly, there is evidence that sustainable investing in companies with robust ESG credentials leads to better financial returns, and funds have now realised this includes private markets. ESG often embodies the principles of operational best practice; a top concern for private equity firms. One client cited their portfolio company’s improved ESG credentials during the investment period as the reason for the attractive valuation on exit compared to its peers.

However, this is where private markets face their biggest challenge; measuring the ESG performance of private investments when data is fragmented as compared to public markets; as there is still no standardised reporting framework for asset owners. Listed equities have a multitude of data collection solutions, providers and indices, yet there still remain few reputable independent ESG ratings and advisory providers for the private markets in APAC. 

With a growing appetite and incentives to meaningfully engage with ESG, there remain several questions facing private equity in APAC and globally:

  • What is the most reputable methodology to use, and robust ESG data to capture to avoid accusations of ‘greenwashing’?
  • How can private markets source this ESG data in a time efficient, logical, accurate manner?
  • Who should they measure ESG performance against, including international standards and sector peers?

One of the key challenges for private asset managers is answering these questions in a consistent way, consideringthe absence of an international standard for data formats. Private markets have been seeking an independent, end-to-end offering that ensures relevance, consistency and longevity surrounding ESG.

Impact of Covid

The discussion around ESG has been brought into sharp focus in 2020, along with other types of risks, in the context of the global pandemic caused by Covid-19. In the US and Europe, the pandemic coupled with social movements such as Black Lives Matter, has thrown the ‘S’ or social impact of companies’ operations into sharp relief, while the ‘E’ or environmental impact has been highlighted in APAC. The positive environmental side-effects of Covid-19 have been clearly apparent in Asia, with the reduction in international travel and significantly lowered carbon emissions. It is expected that this growing awareness of carbon emissions, air quality and other environmental factors will heighten interest in ESG going forwards.

Crucially, once we come out the other side of this crisis, private equity funds and their portfolio companies will be in a unique position to act as change agents to build stronger economies in APAC, and ESG considerations will play a prominent role. As such, 2020 has been a transitional year for ESG in APAC, and we are excited for the opportunities 2021 holds for ESG in the region.

Liam Woods, Head of Business Development, APAC

Apex Group ESG Ratings & Advisory